The latest debt figures published by NSO this week confirm that the debt-to-GDP ratio decreased by 3.2 percentage points in 2015, falling from 67.1 per cent in 2014 to 63.9 per cent.

The 3.2 percentage point decrease marked the highest reduction in the debt-to-GDP ratio over the last decade.

The debt-to-GDP ratio for 2015 also outperformed the European Commission Spring forecasts and the Ministry for Finance debt projections.

Commenting on this, Minister for Finance Edward Scicluna remarked: "The significant reduction in the debt-to-GDP ratio shows that the government is continuing to deliver on its promises in the area of public finances. This reflects the resolute way by which the government continues to look at public finances".

The cost of debt, defined as the interest rate applicable to the whole nominal debt, also decreased in 2015, falling from 4.33 per cent in 2014 to 4.12 per cent per annum.

The government intends to continue reducing the debt-to-GDP ratio beyond the 60 per cent threshold as set by the Maastricht Criteria, the minister added. This would not only help in attaining public finance sustainability but will augur well for an upgrade in sovereign rating by credit rating institutions.

From 63.9% of GDP in 2015, the general government debt is projected to decrease further to 60.9% of GDP in 2016 and to reach 58.3% by 2017,the Commission's Spring Economic Forecast confirmed. (See TMBW 5 May)

But the more recent report by the European Council (TMBW 26 May) speaks of a risk of a significant deviation. There is a high risk of a significant deviation from the recommended adjustment towards the medium-term objective in 2015 and 2016 taken together, essentially stemming from the slippage in 2015 which needs to be corrected for in 2016, and under unchanged policies in 2017.

In order to reduce the deviation over the two-years 2015-2016, the 2016 stability programme includes additional measures for 2016 that could not yet be included in the spring forecast.

These measures are targeted at reducing primary expenditure (by 0.16% of GDP), especially in the areas of compensation of employees, intermediate consumption and capital transfers. In addition, the estimates of some of the revenue measures for 2016-2019 have been revised to reflect more up to date information, as well as the actual impact of the measures for 2015.

Taken together, these measures have a net deficit-reducing impact of 0.2% of GDP. Compared to the Commission forecast, factoring in these measures would improve the structural effort, and the structural balance pillar would point to some deviation on average over the two years whereas a risk of a significant deviation would remain in 2017.

Malta is forecast to comply with the debt reduction benchmark both in 2016 and 2017. Based on its assessment of the stability programme and taking into account the Commission 2016 spring forecast, the Council is of the opinion

that there is a risk that Malta will not comply with the provisions of the Stability and Growth Pact.

Therefore, further measures will be needed to ensure compliance in 2016 and 2017. The long-term sustainability of public finances in Malta remains a challenge. This is mainly due to the budgetary impact of ageing-related costs, such as healthcare and long-term care and pensions. The pension system faces the double challenge of achieving sustainability while ensuring adequate retirement incomes. Pension expenditure was lower than the EU average in 2013, at 9.6 % of GDP, but it is projected to increase to 12.8 % by 2060, one of the highest in the EU.